What are the 4 types of inventory?
The four types of inventory are raw materials, work-in-progress (WIP), finished goods, and maintenance, repair, and overhaul (MRO) inventory. Knowing which items belong to which category allows you to optimize your operations and account for each step of the production process more efficiently.
Now that different types of inventory have been laid out, let’s dive deeper into what each category consists of and what to keep in mind when managing them.
Raw materials are all the items that your business uses to manufacture finished products.
These materials can be sourced, produced by your company, or procured from a supplier. Raw materials can be further classified into two categories:
- Direct raw materials
- Indirect raw materials
Direct raw materials
Direct raw materials are the components that are used directly in the final product. These materials are easy to quantify and account for per unit or per batch basis.
Indirect raw materials
Indirect raw materials are the components that are not part of the final products but are used during the production process. Indirect raw materials are harder to identify and account for since they can’t be traced to specific batches or units. However, these are essential for the production process.
For instance, one of Acme Corp’s top-selling products is its Plush Couch 5000. To manufacture each Plush Couch 5000, Acme Corp requires high-quality metal frames, foam, and leather as raw materials. However, the main component of the Plush Couch 5000 happens to be one ridiculously large spring that can shoot your target to the stratosphere. These are the components that it can easily quantify and price.
So Acme categorizes these as its direct raw materials.
Of course, making a couch isn’t as simple as throwing foam and leather on top of a frame. The company also requires tools, screws, glue, staples, and leather wax to manufacture the couches. However, it is pretty hard to quantify how much leather wax or how many staples are used on each couch.
So these raw materials are categorized as indirect raw materials.